government opens fdi tap for ‘financial services’ under automatic route

4

Click here to load reader

Upload: bmr-advisors

Post on 15-Apr-2017

42 views

Category:

Economy & Finance


1 download

TRANSCRIPT

Page 1: Government opens FDI tap for ‘financial services’ under automatic route

Vol. 12 Issue 10.2 October 7, 2016

About BMR Advisors | BMR Newsletters | BMR Insights | Events | Contact Us | Feedback

Government opens FDI tap for ‘financial services’ under automatic

route

In his Budget Speech on February 29, 2016, the Finance Minister had indicated that

“Foreign Direct Investment (“FDI”) will be allowed beyond the 18 specified Non-

Banking Finance Companies (“NBFC”) activities in the automatic route in other

activities which are regulated by financial sector regulators.” The Union Cabinet

subsequently approved an amendment to the regulations relating to FDI in NBFC in

August 20161, although no details were published.

On September 9, 2016, the Reserve Bank of India (“RBI”) issued a notification2

(“Notification”) which contains the relevant details and introduces required

amendments to the Foreign Exchange Management (Transfer or Issue of Security by

a Person Resident outside India) Regulations, 20003 (“FEMA 20”) in this regard.

We have summarized below, the key changes that have been introduced by the

Notification.

Particulars Old position After the Notification

Permitted

sectors

18 specified sectors namely:

i) merchant banking

ii) under writing

iii) portfolio management

services

iv) investment advisory

services

v) financial consultancy

vi) stock broking

vii) asset management

viii) venture capital

ix) custodian services

x) factoring

xi) credit rating agencies

xii) leasing and finance

xiii) housing finance

xiv) forex broking

xv) credit card business

xvi) money changing business

xvii) micro credit

xviii) rural credit

Freely permitted in any

activity for which a

registration is required with

the RBI, Securities and

Exchange Board of India

(“SEBI”), Pension Fund

Regulatory and

Development Authority

(“PFRDA”), National

Housing Board (“NHB”) or

any other financial sector

regulator as notified by the

Government of India.

FDI also permitted in

activities which may not

require registration with a

designated regulator,

although all such

investments will require

prior approval of the Foreign

Investment Promotion

Board (“FIPB”). While

granting such approvals, the

Government may stipulate

Share

Connect

EBG & BMR Advisors Webinar: Impact of

GST on businesses in India

GST: Is India Inc Ready?

GST: Are states ready?

Sectorial analysis of the Model GST Law

Draft Model GST Law - A BMR Phone

Conference

A BMR Webinar on India Mauritius Tax

Treaty Amendment

CNBC TV-18 & BMR Advisors CEO Poll

on 2 Years of Modi Government

India’s Economic Performance and

Business imperatives: Making India

Business Friendly

Managing Tax Disputes in India

Taxand Global Survey 2015

2016:

Tier 1 firm in International Tax Review,

World Tax 2016 Guide to World’s Leading

Tax Firms for the ninth consecutive year

Page 2: Government opens FDI tap for ‘financial services’ under automatic route

such conditions as it may

consider appropriate

including minimum foreign

investment required

Minimum

foreign

investment

requirements

Was a function of:

(i) Nature of activity, ie

whether fund-based or

non-fund-based; and

(ii) Level of foreign ownership

The minimum foreign investment

requirement for investment in a

non-fund based activity was USD

500,000; this was regardless of

the level of foreign ownership in

the Indian company.

For activities that were classified

as fund-based, the minimum

foreign investment requirement

was as below:

- USD 0.5 million for foreign

capital up to 51 percent

- USD 5 million for foreign

capital more than 51 percent

and up to 75 percent

- USD 50 million for more than

75 percent

No minimum investment

requirements prescribed;

minimum investment may

be specified by concerned

regulator/ government

agency

Downstream

investments

In cases where foreign ownership

in the parent NBFC was 75

percent or lower, step down

subsidiary was also required to

meet minimum foreign investment

requirements (as discussed

above)

No minimum investment

requirements prescribed

BMR Comments

FDI policy has been one among the various areas that the Government has

been targeting to ease doing business in India and to encourage long term

investments. This is the third major relaxation in FDI norms since November

2015. In November 2015, sectoral caps in select sectors such as defence,

construction and development, retail, broadcasting, civil aviation, banking and

manufacturing were enhanced and the need for prior investment approval was

dispensed with in certain situations (for details, refer our BMR Edge dated

November 23, 2015 – ‘Progressive reforms measures rolled out to the Foreign

Tier 2 firm in International Tax Review,

World Transfer Pricing 2016 Guide

2015:

Tier 1 firm in International

TaxReview,World Tax 2015 Guide to

World’s Leading Tax Firms for the eighth

consecutive year

Tier 2 firm in International Tax Review,

World Transfer Pricing 2015 Guide

Ranked No.1 & No.8 (by deal count) Most

Active Transaction Advisor for M&A and

PE deals by Venture Intelligence

Mukesh Butani, New Delhi

+91 11 6678 3010

[email protected]

Rajeev Dimri, New Delhi +91 124 669 5050 [email protected]

Gokul Chaudhri, New Delhi

+91 124 669 5040

[email protected]

Bobby Parikh, Mumbai

+91 22 6135 7010

[email protected]

Amit Jain, Pune +91 20 668 19010 [email protected]

Kalpesh Maroo, Bengaluru

+91 80 4032 0090

[email protected]

Bobby Parikh

Parul Jain

Amit Bablani

Vignesh Iyer

Page 3: Government opens FDI tap for ‘financial services’ under automatic route

Direct Investment Policy’). Subsequently, in June 2016, the Government

announced further changes in FDI norms across nine key sectors including the

raising of permissible FDI ownership in defence, aviation and the food

processing sectors (for details, refer our BMR Edge dated June 21, 2016 -

‘Further liberalisation in FDI regime – most sectors now under automatic

route’). These reforms, coupled with other efforts of the Government have

raised FDI flows into India from USD 45.15 billion in 2014-15 to USD 55.46

billion in 2015-16.

While the present step is progressive, the manner in which the policy revision

has been implemented raises some concerns which did not previously exist,

and also leaves some matters unaddressed.

Overall observations

The FDI policy construct permits foreign investment in all sectors unless

there are explicit prohibitions. Further, where it considered it necessary, the

Government permitted FDI in certain sectors subject to conditions that were

prescribed. The current amendment is progressive to the extent that it does

away with enumerating financial services activities eligible to receive FDI

and instead, freely permits FDI in all regulated activities. However, where it

seems to depart from the overall FDI policy construct is by stipulating that

FDI in financial services activities that are not regulated will require prior

Government approval. If financial sector regulators do not require a

particular financial services activity to be subject to prior registration

requirements, it is unclear why the Government should subject FDI in such

activities to a prior approval requirement. From a policy perspective, it is the

sector regulators who are best placed to monitor developments in the

sector, and to regulate activities as they consider appropriate to serve the

required public policy objectives. It is unclear why the Government should

seek to serve as a monitor for the financial services sector and seek to

regulate FDI in the sector. Prior experience suggests that such formulations

contribute to uncertainty and ambiguity, something that the Government is

otherwise striving to mitigate if not eliminate.

Investment managers and advisors

Investment advisors (“IAs”) rendering services to offshore funds (or other

clients based outside India) are specifically exempt from seeking registration

under the SEBI (Investment Advisors) Regulations, 2013 (“SEBI IA

Regulations”). A number of investment advisory entities established and

operating in India have varying levels of foreign ownership. So far, FDI in

such entities was permitted freely and required no prior approval; the activity

was regarded as non-fund based, and 100 percent foreign ownership was

permitted subject to a minimum foreign investment of USD 500,000. After

the Notification, it appears that FDI in IA entities will require prior

Government approval since IA entities are not required to register with any

of the notified sector regulators.

While Alternate Investment Funds (“AIFs”) are duly regulated by SEBI, the

investment manager (“IM”) to such AIFs, although indirectly regulated by

SEBI under the SEBI (Alternate Investment Funds) Regulations, 2012 (“AIF

Regulations”), are not required to be registered with SEBI separately. If the

Notification were to be followed literally, FDI in an entity which would operate

Page 4: Government opens FDI tap for ‘financial services’ under automatic route

as the IM of a SEBI-registered AIF may require prior Government approval,

which is not presently the case. A similar situation may also arise with

regard to FDI in an entity which manages a SEBI-registered mutual fund. In

our view, this is unlikely to have been the Government’s intention while

formulating the revised FDI norms.

1 As confirmed by a Press Release dated August 10, 2016 issued by the Press Information Bureau

2 Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Thirteenth

Amendment) Regulations, 2016, No FEMA 375/ 2016-RB

3 FEMA 20/2000-RB dated May 3, 2000 [GSR 406(E) dated May 3, 2000] as amended from time to time

BMR Business Solutions Pvt. Ltd.

36B, Dr. RK Shirodkar Marg, Parel, Mumbai 400012, India

Tel: +91 22 6135 7000 | Fax: +91 22 6135 7070

BMR and Community

BMR has a strong commitment to good citizenship and community service. We are as dedicated to community work as we are to client

work. Wherever appropriate we partner with our clients in fulfilling our social responsibility. Through the firm’s ‘Go Green Initiative’ we

adopt environment friendly practices at our work place. The firm actively supports SOS Children’s Village, Indian Red Cross Society and

MillionTrees Gurgaon campaign. For more details on our social and environmental responsibility programme, click here.

Disclaimer:

This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of

preparation and does not express views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no

responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be

accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This

newsletter does not substitute the need to refer to the original pronouncements.

Copyright 2016. BMR Business Solutions Pvt. Ltd. All Rights Reserved

In case, you do not wish to receive this newsletter, click here to unsubscribe